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Monday, August 09, 2010

Does It Matter What We Do?

Posted by
Martin Ryan

I read today on the Irish Independent website that "the Dublin Institute of Technology is scrambling to create 900 extra college places next month, following a surprise €3m invitation from the Department of Education and Skills. At least half a dozen other colleges have also been contacted within the past few days to run degree, diploma and other courses for jobless adults." Upon further investigation I found this press release (5th August) on the Dept. of Education and Skills website, which documents the allocation of an additional €12 million to the Labour Market Activation Fund. "The additional funding will support education and training programmes for at least 5,000 additional unemployed people and will bring the total number of participant places supported by the Fund to over 11,000 this year."

A fair question is whether education and training programmes are the best use of any available funds. Getting one of these places is undoubtedly a positive experience for the 11,000 (potential) participants, notwithstanding the fact that education and training do not guarantee subsequent employment in current labour market conditions. Those conditions worsened last week: the July Live Register figures reached 418,100 (seasonally adjusted); that is 38 times the 11,000 places on this year's training programmes. Last week's Live Register figures correspond to an increase in the seasonally adjustedstandardised unemployment rate from 13.4% in June to 13.7% in July. This is the worst unemployment figure to date since the Irish labour market collapsed in 2008.

As with the education and training programmes, the WPP serves to make unemployed individuals more employable, but does nothing to improve labour market conditions. Last year's changes to the Jobseeker’s Allowance and Supplementary Welfare Allowance may seem quite harsh, but reservation wages may currently be too high. This is an area that at least deserves more research. Here is an IZA working paper from 2008 that discusses the relationship between unemployment benefits and reservation wages. It is also worth reflecting on how we might expect this relationship to change over a boom-bust economic cycle. I am not recommending any particular policy here. I simply want to highlight the importance of labour market conditions for employment-growth, and to pose the question: 'Does It Matter What We Do?' A recent YouTube video from ChicagoBusiness.com (shown below) depicts the Illinois unemployment rate in a cartoon. It ends with the tagline: "It doesn't matter what I do... I just keep gaining!!!"

In closing, I do think it matters what we do; and that we can do better. On a previous occasion Liam drew my attention to a Forbes article by Chicago economist Steven J Davis, which outlined ideas to reduce unemployment. My interpretation of the Davis approach is to temporarily reduce the extent of labour market regulations: to make it cheaper for employers to start hiring again. As Kevin has noted before, a lot of the evidence around cutting the minimum wage, tightening the benefit system and monitoring search effort more closely may come from economies that are closer to the equilibrium rate (of unemployment). However, I still think this evidence is worth examining. One place to start is the Nickell, Nunziata and Ockel paper (Economic Journal, 2005); abstract below:

UNEMPLOYMENT IN THE OECD SINCE THE 1960s. WHAT DO WE KNOW?

"This paper presents an empirical analysis of unemployment patterns in the OECD countries from the 1960s to the 1990s. Our results indicate the following. First, broad movements in unemployment across the OECD can be explained by shifts in labour market institutions. Second, interactions between average values of these institutions and shocks make no significant additional contribution to our understanding of OECD unemployment changes."

Finally, Brendan Walsh's paper "Cyclical and Structural Influences on Irish Unemployment" (Oxford Economic Papers, 2000) describes the massive reduction in Irish unemployment over the course of the 1990's. Competitiveness, the generosity of the social welfare system and the wage bargaining process are all discussed.